Nortel gets court OK to auction enterprise solutions unit

The business marked for the auction block in September accounted for more than one-fourth of Nortel's revenues in 2008, according to Justice Geoffrey B. Morawetz of the Superior Court of Justice of Ontario.

Morawetz conducted a joint hearing on the auction plan with Judge Kevin Gross of the U.S. Bankruptcy Court in Wilmington, Del., and both signed off on the plan.

Nortel got the nod on the auction after tailoring bid rules to accommodate concerns about the sale, including one from big creditor MatlinPatterson Global Advisers.

MatlinPatterson fretted that Avaya's large presence in the market could raise red flags with antitrust regulators. If Avaya comes out of the auction the winner, the deal, or the price Nortel gets, could be jeopardized if antitrust regulators step in, the private-equity firm said.

"We believe that regulatory approvals here may be an uphill battle," said Jennifer Feldsher, attorney for the private-equity fund. She is with the firm Bracewell & Giuliani.

If it wins the auction, Avaya, of Basking Ridge, N.J., stands to become the largest provider of enterprise voice communication over Internet-based business systems, an analyst has said.

Most of the serious bidders in preliminary rounds were strategic buyers, like Avaya, who are looking to boost their market share by taking on Nortel's customers, said Nortel attorney James Bromley, who is with Cleary Gottlieb Steen & Hamilton.

Nortel filed for insolvency protection in January, with debts outstripping revenues. The enterprise solutions unit has been hit by stiff competition, Bromley said.

"This business bleeds," said Derrick Tay, Nortel's Canadian attorney.

The Canadian side of Nortel welcomed changes called for by MatlinPatterson because they are meant to produce a deal that has a good chance of closing quickly, said Tay, who's with Ogilvy Renault.

Leading up to Tuesday's court session on the enterprise solutions auction, Nortel also bargained over changes with customers who have a major stake in who gets the unit.

Verizon Communications Inc. negotiated for language to shield its contracts with Nortel for enterprise products. A "major, major purchaser and re-seller of Nortel's products," Verizon is concerned that the auction winner is a company capable of holding up Nortel's end of contracts, said Verizon attorney Darryl Laddin.

Nortel equipment, through Verizon, carries voice, data and intelligence information through government agencies, the courts, hospitals and law enforcement channels, said Laddin, who's with Arnall Golden Gregory.

Verizon will be quickly notified whether Avaya or another bidder plans to take on Verizon's deals with Nortel, a provision designed to keep a lid on the "risk to national security, risk to the public" from the planned sale, Laddin said.

Additionally, the U.S. Department of Justice required language in the bid rules that recognizes Nortel's direct contracts with the U.S. government can't be handed off to a buyer over the objections of the government agencies.

Nortel agreed to give the Justice Department the names of expected bidders by Wednesday to give it a chance to raise objections well in advance of the auction. Nortel's government solutions unit is part of the deal.

The troubles of the big Toronto telecom-equipment maker hit a nerve in Canada. The fate of the company's sensitive patents became a matter of concern now that Nortel has announced it will sell itself off in pieces.

Nortel attorney Tay said 7,800 jobs are involved in the enterprise and government solutions businesses. The company won't say how many of those jobs will be saved if Avaya wins the auction. However, job preservation was a "significant consideration" in the decision to choose Avaya's offer as the starting point for the bidding, Tay said.

The enterprise unit auction marks the second major sale in Nortel's insolvency proceedings. At the end of July, Telefon AB L.M. Ericsson's won an auction for the bulk of Nortel's North American wireless business with an offer of some $1.13 billion.